Educational Articles

Airline Fees, Eventually Customers Will Say “No Mas”

Reuben Gregg Brewer
| June 24, 2012

This trot down boxing’s memory lane may seem to have nothing at all to do with airlines, but it does. In fact, it should be a warning to the major carriers. Simply put, customers are getting fed up with all of the fees. I know this because I’m such a customer.

My wife recently took a quick long-weekend trip to the Caribbean with our eight-year-old daughter on a major airline. She was shocked to find that our child’s seat wasn’t right next to her own. Not wanting our child to be so far away from her, or for some stranger to have to put up with her (she is, honestly, a very well behaved child—but you never know), my wife dutifully tried to change the seating. She could, but only for a seat change fee. She called the company to explain that our child was a minor—it didn’t matter. So, my wife paid to have the seats changed so our daughter could sit next to her. When she took the flight, the plane was mostly empty.

It would be polite to explain that this event left my family saying, “We’ll only fly with that airline again if we have to.” That is a customer response that only a monopoly can afford, and airlines are far from a monopoly. Granted there are an increasingly limited number of airlines, with mergers and bankruptcies weeding out the weaker and more leveraged industry participants, but there remain ample options for flying. My family is not alone in its outrage.

The seat change fee comes on top of an array of other fees. For example, many airlines charge customers to bring luggage. Others charge for pillows and blankets. Most charge for food. And some charge for the “privilege” of an advanced seat assignment (forget that such digital interactions are probably cheaper than having to visit with a company employee for a seat assignment on the day of the flight). There have even been fees thrown around for bringing young children and those needing assistance getting onto a plane before the usually disorganized check-in “free for all”—seating passengers that need more time to get situated has historically been both a convenience for the early boarders and everyone else who has to get on the flight. The tack-on fees have gotten so bad that some riders joke about expecting to find coin-operated lavatories.

This new “charge for everything we can” shift is from an industry that once prided itself on customer service and luxury. Clearly, there are real reasons for the tack-on fees and charges—it is expensive to run an airline and maintaining profitability is, at best, challenging. Still, there are airlines that thrive without resorting to what many believe are petty fees.

There are arguments for some of the fees that go beyond an attempt to increase revenue. For example, business travelers, generally the industry’s most profitable customers, believe that priority seating fees (attached to aisle seats) allow them more access to the most comfortable seats. This is particularly appeasing to this customer segment since business travelers often pay higher fares than those flying for leisurely pursuits. Indeed, business customers have been complaining for years that they pay higher fares (because of short notice flying patterns) and get the worst seats. Still, there are plenty of fees that no one likes.

Investors in this often volatile space should take a moment to consider the long-term risks of these extra fees, even though they may be adding real revenues in the here and now. Things of this nature tend to move in cycles, and, it is likely that, eventually, like Duran when he fought Leonard, flyers will get tired of the hits and simply say, “No mas.” The companies that have managed to stay in the air without tacking on all the fees, or at least doing so in the least offensive way, will likely be the long-term beneficiaries. Two airlines that should be on investors’ lists are JetBlue (JBLU) and Southwest (LUV).

JetBlue Airways primarily uses a point-to-point route system, as opposed to the more-common hub-and-spoke model used by the larger airlines. The company serves about 70 destinations in 22 states, Puerto Rico, Mexico, the Caribbean, and Latin America. Its focus is on underserved markets and metropolitan areas with high average fares. It has major bases of operation in New York’s JFK and Boston’s Logan airports. The airline’s fleet at the end of last year consisted of 120 A-320s and 49 E-190s. Of note, the seats in the company’s planes all have televisions, a major plus for many travelers. JetBlue has around 14,000 employees.

JetBlue has recently benefited from both solid demand and increased capacity. So, while larger carriers are merging out of existence and cutting capacity, JetBlue, with a generally good reputation among customers, has been growing. The recent target is to have 215 or so airplanes in operation by 2015 (an increase of 46 planes). A high debt load, which is likely to get higher with the addition on new planes, is an issue, but reputation isn’t.

Southwest Airlines is one of the largest carriers in the United States by revenues and the largest by passengers flown. It specializes in low fares and short-hauls using a point-to-point system, versus the hub-and-spoke model. Notably, the airline acquired competitor AirTran in mid-2011. At the end of last year, Southwest served 72 cities with a fleet of 698 aircraft (199 of which were leased). It has 350 additional aircraft on order with an option for 245 more. The company employs approximately 45,000 employees.

Fuel costs have led to losses at Southwest recently, however demand has been improving and oil prices declining. This suggests that better times may be near at hand, particularly since management expects continued cost savings from the recent AirTran merger. The company is well known for its friendly staff (note that using the ticker LUV, which was obviously purposeful, obliges a company to be nice) and ease of use, a fact that has led to legions of fans.

While other major carriers, such as Delta (DAL) and United Continental Holdings (UAL), continue to tack on the fees, JetBlue and Southwest continue to build a loyal customer base and, as a result, their repeat business. Eventually, the tides will turn and flyers will get fed up with all of the extra small charges—that will be the “No mas” moment when airlines like JetBlue and Southwest shine.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.